Australia's all-important services sector looks like it had a strong start to the year

Melbourne. Photo: Vince Caligiuri/Getty Images

Australia’s services sector, the largest employer in the country, enjoyed a strong start to the year, offering confidence that the shock GDP contraction of the September quarter was likely a one-off aberration.

The latest Performance of Services Index (PSI), released by the Ai Group on Friday, came in at 54.5 in January, leaving it down 3.2 points from December.

The PSI measures changes in activity levels across Australia’s services sector from one month to the next. A score of 50 is deemed neutral, meaning activity levels neither improved or declined compared to one month earlier. A score above 50 suggests they improved while a sub-50 reading suggests they deteriorated, with the distance from 50 indicative of how fast the change occurred.

So, while the PSI fell last month, at 54.5, it indicates that activity levels continued to improve, albeit at a slightly slower pace than December.

It has now printed above 50 for four consecutive months.

And, as seen in the chart below, the PSI’s three-month moving average — a better gauge on the overall trend in activity levels — rose to 54.4 in January, leaving it at the highest level seen since March 2008.

Mirroring the strength in the headline PSI, most of the survey’s activity subindices also improved during the month, albeit at a slower pace than seen in December.

The one exception was the measure on supplier deliveries which jumped by 10.2 points to 61.0 in trend terms, indicating the fastest increase seen in the history of the survey.

That may have been as a result of a decline in stock levels which fell to 45.9, down 6.7 points from December.

Elsewhere, sales, employment growth and new orders all continued to increase, but at a slower pace.

The new orders gauge — a lead indicator on future activity levels — fell to 51.8, a sharp slowdown from the levels seen in December.

Source: Ai Group

By industry, activity levels in six of the nine tracked in the survey improved, a reasonable result that suggests the strength was broad-based across the services sector in January.

In particular, there was some pleasing news from retailers with the industry subindex jumping by 4.1 points to 55.6, its highest level seen in seven months. It also snapped a run of five months where activity levels for retailer either declined or remained unchanged.

That’s an important outcome should it be sustained, particularly following an unsettling decline in business conditions across the sector in the separate NAB business confidence survey in recent months.

Activity levels across the transport and storage sector — seen by some as a gauge on underlying conditions across the broader Australian economy — also improved for the first time since September 2011.

The Ai Group said that a number of regional respondents noted that a good agricultural season, both for crops and prices, had a positive impact on some services sectors. It also said that better customer confidence and demand, along with the relatively low Australian dollar, also helped to boost optimism among respondents.

However, it said that the cost of utilities, lack of disposable income, auto industry closures and lower demand from mining businesses were factors that weighed on sentiment over the month.

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